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Has oil broken the trend?

Relevance up to 05:00 2022-07-17 UTC–4

When Greed gives way to Fear in the market, a serious correction of the upward trend begins. In the best case for the bulls. At worst, the trend may break down altogether. The rapid rally of Brent since the beginning of the year was associated with excessive optimism about the recovery of global demand after the supposedly completed pandemic amid the displacement of Russia from the market. The return of COVID-19 and the approach of the global recession have forced investors to overestimate values. This process is always complicated, often goes with a creak and in the summer led to a serious rollback of the North Sea variety.

Fears about a downturn in the global economy are perhaps the main driver of falling oil prices. In China, companies are shutting down business, and the population is going into isolation amid an increase in the number of infected COVID-19. About 30 million people are under some form of restrictions. At the same time, Bloomberg analysts predict a slowdown in China’s GDP to 1.7% in the second quarter, which will be the worst indicator since the beginning of the pandemic in 2020. Russia’s shutdown of gas has increased the risks of a recession of the German economy over the next 12 months from 20% before the armed conflict in Ukraine to 55%. The leading indicator of the Atlanta Federal Reserve predicts a 1.2% decline in US GDP in April-June after a 1.6% decline in January-March.

Global demand for oil decreases during crises, which contributes to falling prices. A strong dollar accelerates the correction. Its trade-weighted and inflation-adjusted exchange rate is currently at the third highest level in history. The greenback was stronger only in 1985 and 2002. Since oil is quoted in US dollars, the strengthening of the latter is a negative for Brent. It is not surprising that hedge funds have reduced net longs for the North Sea variety to lowest levels since 2020.

Dynamics of oil and the US dollar

Thus, the rebalancing of demand is in full swing, however, according to the US, this is not enough to guarantee a further drop in prices. Washington does not abandon hopes to reduce Russia’s revenues from the sale of oil and at the same time increase global production. To do this, the idea of a price ceiling and US President Joe Biden’s visit to Saudi Arabia, which he previously called a rogue country, are used.

According to the estimates of the US Treasury Department, if the embargo mechanism works in full force, 5.5 million barrels of oil and petroleum products will be removed from the market, which will lead to a rise in Brent to $140 per barrel. To prevent this from happening, the idea of a price ceiling for Russia is being developed. At the same time, the United States is calling on OPEC to raise production, claiming that Saudi Arabia and the UAE can do it by 3 million b/d.

Technically, there is a correction on oil’s daily chart. The idea of selling Brent from $113.9 per barrel was clearly realized and brought profit. At the same time, the possible activation of the Wolf Wave pattern can lead to the recovery of the upward trend. Therefore, a breakthrough of the resistances at $107.5 and $111.3 is a reason to buy oil.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

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